Babcock's directors sued

An application filed with the Federal Court on Wednesday alleges that for three years, starting in 2005, the directors of Babcock & Brown Ltd (BBL) allowed a breach of the Corporations Act's capital-reduction contravention provisions.

They are also alleged to have breached BBL's own constitution by authorising multimillion-dollar dividends that were $160 million shy of its profits. In the process, it is alleged they reduced the share capital of BBL.

The defendants in the action are former chairman Jim Babcock, former managing director and CEO Phil Green, former deputy chair Elizabeth Ann Nosworthy, and former directors Geoffrey Martin, Dieter Rampl, Joe Roby, Martin Rey, James Fantaci, Michael Sharpe, and the auditors Ernst & Young.

Babcock & Brown was one of the last decade's high-flying investment stocks and at its height was worth

$10 billion. But its complex ownership structure and huge debt burden brought it down after the global financial crisis and it went into liquidation in 2009.

The company's failure and the loss of shareholder value have been the subjects of a long-running probe by B&B's liquidators, Deloitte, which last year conducted public examinations in the Federal Court of the group's former executives and auditors. The application lodged this week alleges that by adopting the dividend proposal, the directors failed to regard the interests of BBL separately from the interests of other companies in the Babcock & Brown group.

The court document shows that payment of dividends for the previous financial year were to be paid from revenue due to be received in the coming financial year from Babcock & Brown International Pty Ltd (BBIPL).

"The corporate structure and financial arrangements entered into by BBL and BBIPL required the directors to pay particular attention to ensuring BBL did not pay dividends out of profits or reduce its share capital without authorisation, given that BBL owed substantial obligations to holders of Babcock & Brown subordinated notes [and] the rights of those holders . . . was subordinated to the rights of the bank financiers of BBIPL." It is alleged the directors breached their duty to exercise reasonable skill, care and diligence in authorising the dividend payments. For the year 2005, they authorised dividends of $32.9 million, though BBL had retained earnings of only $5.5 million.

The following year, $56.3 million in dividends was paid (against retained earnings of $10.6 million), and for the year 2007 nearly $97 million was paid in dividends, against retained earnings of $11.95 million.

It alleges the auditor reviewed the proposed dividend memorandums, and that if it had conducted the audit with reasonable care, skill and diligence, it would have recognised BBL's retained earnings were insufficient to pay the dividends, and the effect was to reduce the share capital of the company. It failed to report the contravention to BBL's board or management and to ASIC, and should not have expressed an opinion that the financial reports were in accordance with the act.

"Had Ernst and Young reported the contraventions or apprehended contraventions to BBL's management or board or to ASIC, BBL would not have paid dividends otherwise than from profits and thus would not have suffered the [$160 million] losses," the documents said.

The defendants are yet to respond to the allegations. The matter is listed for a preliminary hearing on September 9.

The court action is by liquidator David Lombe of Deloitte.